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OCEAN FREIGHT

A closer look at how charges for ocean transit are calculated.

Freight Costs

These are the costs incurred by the merchant (e.g. customer / cargo owner) in moving goods, by whatever means, from one place to another under the terms of the contract of carriage.

In addition to transport costs this may include such elements as packing, documentation, loading, unloading and transport insurance.

Elements of these costs include:

Freight - the amount of money due for the carriage of goods, payable either in advance or upon delivery.

Charge - an amount to be paid for the carriage of goods based on the applicable rate of such carriage, or an amount to be paid for a special or incidental service in connection with the carriage of goods.

Surcharge - an additional charge added to the usual or customary freight.

How is freight calculated?

Just how does an ocean carrier such as MSC calculate the level of freight to charge its customers for transportation services? The answer is, of course, it depends.

Since we ship 20’ and 40’ containers, you might think that, in essence, a 40’ is double the price of a 20’ container because it takes twice as much space on board a vessel – but that’s not actually how it works. From our point of view lifting a 20’ or a 40’ is, in many regards, the same.

There are other factors which can affect the freight such as:

Weight – carriers spend energy (fuel) to move a mass (the container), and so it costs more to move a heavier box. Just because a 40’ container is double the length of a 20’, it cannot bear double the weight. The container would need to be double the strength for that to be true. In fact the elongated shape of a 40’ means that it can bear slightly less weight (26,600 kg) than a 20’ (up to 28,200 kg). Consequently, heavier cargoes tend to be shipped in 20’ containers, with 40’ units utilised for more lightweight merchandise.

Need for special equipment – the nature of some cargoes means that they cannot be shipped in a ‘standard’ dry container. Instead they might need special equipment such as an open-top container (OT), flatrack (FR), platforms (PL) or refrigerated container (RF / reefers). Such requirements are likely to incur extra freight costs. In addition, with reefers, the carrier has a more direct responsibility towards the cargo, the containers must be monitored, in optimum condition at all times and they draw power during transit. Also, where flatracks or platforms are used – typically for out-of-gauge cargo – the ocean freight will be negotiated each time based upon the particulars of that ship/voyage.

Value of the contents – as a general rule (there may be occasional exceptions), ocean freight rates are likely to be more expensive for higher value cargoes, reflecting liabilities and insurance concerns. Thus a container of pharmaceutical products is likely to cost more to ship than a container of waste paper.

Availability of vessels in a given trade zone – inevitably in a free market, where there is a lot of competition between carriers in a given trade zone/lane, ocean freight rates tend to be lower. Similarly if the volume of cargo exceeds the total capacity of vessels in that trade zone, the tariff tends to be higher.

Type of inland transport – the ocean freight can also be affected by who/how the cargo is to be transported inland. In other words it depends whether the carrier or the merchant effects and bears the responsibility for inland transport of cargo in containers i.e. a differentiation between the logistical and legal responsibility. The two main designations for haulage are Carrier (or line) haulage and Merchant haulage. With Carrier haulage the shipping line arranges the haulage, while with Merchant haulage the customer makes the arrangements.

Various charges

Traditionally, ocean carriers charged an ocean freight, plus two surcharges: the Terminal Handling Charge (THC) at the port of load and the THC at the port of discharge. The THC is the sum ports-charge carriers such as MSC to operate at their facilities.

Other potential surcharges include:

Currency Adjustment Factor (CAF) - This is an adjustment applied by the carriers on freight rates to offset losses or gains resulting from fluctuations in exchange rates of tariff currencies. For instance, we might have our tariff set in one currency, say, the US Dollar, while we accept payments all over the world in all sorts of currencies.

Bunker Contribution (BUC) - Inevitably fuel price is a significant factor in ocean transport (bunker being the term for fuel used by merchant vessels). Carriers such as MSC had to put in place a Bunker Contribution, which is an adjustment applied to offset the effect of fluctuations in the cost of bunker fuels.

Lump-sum - this is an agreed sum of money, which is paid in one full settlement incorporating the ocean freight and all application surcharges. This term is often used in connection with charter parties. A freight can either be broken down into Ocean Freight + CAF + THC + CSC + BUC + EIS, etc.., or simply a lump-sum incorporating all the elements into one simple figure.

Minimum charge - the lowest amount which applies to the transport of a consignment, irrespective of weight or volume. This is mostly applied to breakbulk cargo.

Volume contracts

Like most competitive industries, in international shipping reduced rates are possible in return for an undertaking to provide a larger volume of business. MSC is always willing to discuss the potential for a contracted level of sea freight based upon shipping a certain volume of containers over a specified period of time. Get in touch with your local MSC contact for further details.

The booking

The ideal scenario when we negotiate a tariff is that you, the customer, agree with our rates and wish to make a booking. But what does this actually commit you to and what happens next?

A booking is a reservation, just as you might make for a restaurant table or an airplane flight. It is a tacit agreement that you will provide your merchandise for transport at the price which was agreed.

MSC reserves a space for the merchandise in our vessel (a container slot) and we reserve the container itself at our terminal for your trucker to come and pick-up.

We take in some basic details and will advise you of the booking number. That reference and the trucking company name are transferred to our terminal. A terminal is a secure area and our stevedores will only let a trucker inside if he has a valid booking number corresponding to his company name.

Liner Terms

Every piece of cargo MSC transports is done so under certain conditions of carriage, which are the terms that specify how and where the costs for loading and unloading are levied. These conditions tend to depend on how the individual ports prefer to pass on their cargo handling charges. This varies from country to country and port to port, so be sure to contact your local MSC office for up-to-the-minute clarification.

Some of the most commonly used terms include:

Free In (FI) – when discussing liner terms it is useful to think of the term ‘free’ to mean ‘not’ included’ or ‘free of expenses to the vessel’. As such when a shipment is booked ‘Free In’, the shipper is responsible for the cost of loading the cargo onto the vessel.

Free Out (FO) – this indicates that the consignee or recipient is responsible for the cost of unloading the cargo from the vessel at the destination port.

Free In and Out (FIO) – this term indicates that the carrier / shipping line (i.e. MSC) is not responsible for the costs associated with either loading or unloading the cargo onto or off the vessel.

Liner terms (LI/LO) – charges for both the loading and unloading of the cargo are charged to the vessel (i.e. to MSC). In these circumstances the costs are passed on to the client as a Terminal Handling Charge (THC).

Combinations of the above terms are also common. For example, if the port of loading is a Liner Terms port but the port of discharge is a Free Out port, the shipment would be considered to be LIFO. In practice, there are fewer problems and delays in Liner Terms ports. The THC is a part of the carrier’s tariff and is agreed with the client in advance.

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